August 31, 2012 – GERMANY– Premier Wen Jiabao told German Chancellor Angela Merkel that Europe must “strike a balance” between fiscal tightening and measures to promote growth. “Europe’s debt crisis has continued to worsen, giving rise to serious concerns in the international community. Frankly, I am also worried,” he said. His comments mark a shift in Chinese policy. Beijing has until now backed austerity across Euroland, but the severity of China’s own downturn has begun to rattle policymakers. Exports of electronic goods to Italy crashed 43pc in July from a year earlier, and sales to Germany fell 11pc. Caixin reported that processing trade to Europe fell 21pc. The country’s two largest shipping groups COSCO and China Shipping both reported drastic losses today. The Shanghai composite index of stocks threatened to break below 2000 today, the lowest since the Lehman crisis. Mr. Wen asked for clarification over whether Italy and Spain would adopt “comprehensive rescue measures” needed to unlock the EU bail-out machinery – and open the door to bond purchases by the European Central Bank. Mrs Merkel said eurozone debt remains a “safe investment.” Yet it is far from clear whether China can come to the rescue. Simon Derrick from BNY Mellon said China’s foreign reserves peaked at $3.31 trillion in February, and have since fallen by over $100bn. “China is no longer in the market to buy bonds,” he said. Morgan Stanley said there are signs of incipient capital flight from China. The yuan has fallen almost 1pc since April, and off-shore markets are pricing in further falls over the next year. The risk for Europe is that China could become a net seller of European bonds if forced to run down reserves to shore up the yuan. Germany has reasons of its own for going easy on Club Med austerity. The policy has finally begun to boomerang, with German exports falling by 14pc to Spain and 8pc to Italy. David Owen from Jefferies Fixed Income said Germany’s IFO business climate index has fallen to levels that normally mean recession. “Germany is not falling off a cliff but the confidence numbers are as bad as the UK. We see a high risk of contraction this quarter and next,” he said. Professor Lars Feld from Freiburg, one of Germany’s five “Wise Men,” warned today that euro break-up had become a “relatively large risk” and rebuked hard-line German politicians for “populist outbursts” over recent days. He said an ejection of Greece from EMU would set of a “domino effect” through the EMU periphery, slicing up to 10pc off German GDP. “The markets would promptly ask whether Spain can make it in monetary union.” –Telegraph